Thursday, 30 August 2012

Nowadays, individuals have many different options when it comes to payments such as cash, debit cards, online payments, cheques and credit cards. One thing these methods have in common is convenience but convenience will always come at a price, and sometimes that price can become the beginning of your money problems.

Basic credit card statistics:

Even though the risks and disadvantages of using credit cards are apparent, more and more people use them each day. In the year 2009, one out of every 12 families in London used credit cards to pay the rent or the mortgage loans and one in 8 did the same in the entire United Kingdom.

In the month of June 2012 alone more than 11 billion pounds were spent through credit cards for more than 186 billion purchases with an average transaction value of £64.20 according to the UK Cards Association. With an interest rate of approximately 23% on money borrowed through credit cards, we can imagine how some of the users that were unable to pay back in full may have gotten into difficulties.

Disadvantages of using credit cards for purchasese:

Now before I get into the disadvantages of credit cards I would like to mention 3 ways you can reduce your costs and start saving money:

a) Budgeting. Using a budget to manage your day to day expenses is one of the best ways of saving money.

b) Saving's accounts. Starting a saving's account can be a a great tool to have. You won't even have to trouble yourself by adding funds every month. Simpy ask your employer to wire a percentage of your income dirrectly to your savings account.

c) Payday loans. Short term loans are a good way for people that need money for emergencies get the funds they need in 24 hours. Also compared to credit cards, the interest rate isn't that much higher and the sums you can borrow are quite small.

Here are four major disadvantages to using credit cards:

1. The high interest rates.
Compared to regular bank loans, credit cards have extremely high interest rages. Sometimes this interest rate can be as high as 20% for any purchases that are not paid in full at the end of the month.

2. The illusion of "Free Money".
Credit cards create the illusion of free money and this leads to the temptation to overspend. This makes credit card owners want to purchase things they don't need. Apparetly signing a piece of paper isn't the same as paying in cash. People that are bad at budgeting are the ideal customers for credit card companies, and they know it.

3. The danger of an unpaid balance.
Because you are only billed once a month it is easy to forget how much you spent that same month. This way many credit card users spend more than they can cover at the end of the month. In just a couple of months of unpaid balances the interest rate can be enough to become the start of a long term debt problem.

4. Credit card thef and fraud.
The last but probably most important disadvantage and risk of using credit cards is the posibilty of fraud or theft. There is no need for a modern thief to take your credit card physically, all he needs is some numbers and your money can dissapear from your bank account.

It is important you check each monthly statement to find any clues of fraud.

Credit cards do have advantages but I believe that knowing the disadvanatages is more important when deciding to use a credit card or not.

About Author

Amit Singh is a founder of Theinternationalfinance.com he share his immense knowledge of Finance in this blog.